AdaptHealth Corp. Q2 2023 Form 10-Q Summary
Business context and reporting period
AdaptHealth provides healthcare-at-home solutions, including sleep therapy, diabetes devices and supplies, respiratory services, home medical equipment, and other medical supplies. It serves Medicare, Medicaid, and commercial payors through approximately 710 locations in 47 states and serves approximately 4.0 million patients annually. This unaudited Form 10-Q covers the three and six months ended June 30, 2023, compared with the same periods in 2022.
Stephen Griggs resigned as CEO effective June 30, 2023. Chairman Richard Barasch became interim CEO effective July 1, 2023, and Crispin Teufel is scheduled to become CEO effective September 1, 2023.
Financial performance and key metrics
| Metric | Q2 2023 | Q2 2022 | Change |
|---|---|---|---|
| Net revenue | $793.3 million | $727.6 million | +9.0% |
| Operating income | $54.3 million | $59.2 million | -8.3% |
| Operating margin | 6.8% | 8.2% | -140 basis points |
| Net income attributable to AdaptHealth | $14.0 million | $14.0 million | -0.4% |
| Net margin attributable to AdaptHealth | 1.8% | 1.9% | Down slightly |
| Adjusted EBITDA | $171.0 million | $150.0 million | +14.0% |
| Adjusted EBITDA margin | 21.6% | 20.6% | +100 basis points |
| Free cash flow | $3.7 million | $26.3 million | -$22.6 million |
For the six months ended June 30, 2023, revenue was $1.538 billion, up 7.3%; operating income was $80.4 million, down 27.4%; net income attributable to AdaptHealth was $29.7 million, down 46.8%; and adjusted EBITDA was $305.0 million, up 6.0%. Six-month adjusted EBITDA margin was 19.8%, compared with 20.1% in 2022. Basic EPS was $0.10 in Q2 and $0.20 year to date. Diluted EPS was $0.09 in Q2 and $0.03 year to date; the year-to-date diluted figure was affected by the non-cash gain from the change in warrant fair value.
Q2 revenue growth was led by sleep revenue of $302.6 million, up 16.2%, and respiratory revenue of $154.1 million, up 12.7%. Diabetes revenue increased 1.6% in Q2 but declined 2.0% year to date, partly because certain products and patients shifted toward pharmacy and dual-benefit channels. Fixed monthly equipment reimbursements represented 34% of Q2 revenue versus 32% in the prior-year quarter.
Cash flow, liquidity, debt, and balance sheet
- Six-month operating cash flow was $226.6 million, compared with $169.9 million in 2022.
- Capital expenditures were $171.7 million, producing six-month free cash flow of $54.8 million versus $15.6 million in 2022.
- Q2 free cash flow was only $3.7 million because of higher equipment purchases, interest payments, and working-capital timing.
- Cash was $45.1 million at June 30, 2023, versus $46.3 million at December 31, 2022.
- Gross long-term debt was $2.176 billion, including $750.0 million under the secured term loan and $1.450 billion of senior unsecured notes. The term loan carried a 7.25% interest rate at quarter-end.
- No revolver borrowings were outstanding at quarter-end; covenant-based availability was $124.2 million, with $21.6 million of letters of credit outstanding.
- The company was in compliance with its debt covenants at June 30, 2023. The term loan and revolver mature in January 2026; senior notes mature between 2028 and 2030.
- Working capital was $110.3 million, down from $129.1 million at December 31, 2022. Accounts receivable were $365.7 million, including $37.4 million of unbilled receivables.
Material changes versus the prior comparable period
- Revenue increased faster than operating income, as cost of net revenue rose 10.4% in Q2 and 10.1% year to date, exceeding revenue growth.
- Patient equipment depreciation increased to 10.6% of Q2 revenue from 8.7%, reflecting higher equipment prices and rental counts.
- General and administrative expense increased 17.7% in Q2 and 16.2% year to date, driven by professional fees, systems implementation support, and higher equity-based compensation.
- Interest expense increased 27.1% in Q2 and 28.0% year to date because of higher variable interest rates, partially offset by lower average borrowings and interest-rate swaps.
- The warrant liability fair-value adjustment produced a $0.8 million gain in Q2 and a $22.7 million gain year to date, compared with an $8.2 million Q2 charge and an $18.5 million year-to-date gain in 2022.
- The company completed acquisitions of three HME providers and certain assets of two additional HME businesses for total consideration of $18.2 million during the first six months of 2023.
- The company repurchased $9.2 million of common stock during the first six months, with $176.8 million remaining under the authorized program at June 30, 2023.
Guidance, outlook, commentary, risks, and unusual items
Management formalized a cost-management program in April 2023 involving real-estate rationalization, supply-contract renegotiations, workforce reductions, and more efficient back-office processes. Management expects approximately $40 million of annualized adjusted EBITDA improvement, including approximately $25 million of impact in 2023, with approximately $8 million of costs to achieve. The filing does not provide formal revenue or earnings guidance.
Management expects operating cash flow, existing cash, and available revolver capacity to fund operations and growth for at least the next twelve months, but notes that additional financing may be required for acquisitions and could be unavailable or expensive. Key risks include inflation, labor and transportation costs, supply-chain disruptions, reimbursement and payor changes, competition, acquisition execution, variable-rate debt, healthcare regulation, and seasonality.
- Goodwill was $3.552 billion. The company performed impairment testing after a sustained decline in market capitalization and recognized no impairment; however, estimated fair value exceeded carrying value by less than 20%, creating sensitivity to further declines in market capitalization or operating performance.
- The company paid $5.3 million in April 2023 to settle the EDPA ventilator-billing investigation without an admission or determination of liability; the amount had been accrued at December 31, 2022.
- A shareholder securities class action is stayed pending private mediation, and a related derivative action remains stayed. A separate False Claims Act investigation concerning ventilator billing remains in an early stage, and the potential impact cannot be determined.
- The company reported material weaknesses in internal control over financial reporting relating to risk assessment, process-level controls, and information-technology general controls. Remediation is underway but was not complete as of June 30, 2023; disclosure controls were therefore deemed ineffective.
- Q2 general and administrative expense included $9.4 million of other non-recurring expenses. Year-to-date adjusted EBITDA add-backs included litigation, severance, systems-related consulting, lease impairments, and other unusual items.
Important facts for investors to verify
- Whether the cost-management program delivers the projected $40 million annualized adjusted EBITDA benefit and whether its $8 million implementation cost is accurate.
- The sustainability of sleep and respiratory growth and the impact of pharmacy-channel migration on diabetes revenue.
- Free cash flow conversion after substantial patient-equipment capital expenditures and the effect of higher interest rates.
- Refinancing and liquidity plans for the January 2026 term-loan and revolver maturity, including covenant headroom.
- Progress in remediating the material weaknesses in internal control over financial reporting.
- Potential exposure from the pending securities litigation, derivative action, and False Claims Act investigation.
- The sensitivity of the $3.552 billion goodwill balance to further stock-price declines or weaker operating results.